NIO Inc. (NIO) Q1 2019 Earnings Call Transcript

NIO Inc. (NYSE: NIO)Q1 2019 Earnings CallMay 28, 2019, 8:00 a.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen. Thank you for standing by for NIO Inc.'s first quarter of 2019 earnings conference Call. [Operator instructions] Today's conference call is recorded. I will now turn the call over to your host, Ms.

Jade Wei, senior director of investor relations of the company. Please go ahead, Jade.

Jade Wei -- Senior Director of Investor Relations

Thank you, Annie. Good evening, and good morning, everyone. Welcome to NIO's first-quarter 2019 earnings conference call. The company's financial and operational results were published in the press release earlier today and are posted on the company's IR website.

On today's call, we have Mr. William Li, founder, chairman of the board, and chief executive officer; Mr. Louis Hsieh, our chief financial officer; and Mr. Nick Wang, our VP -- our vice president of finance.

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Louis is joining us by telephone from the United States. Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties.

As such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law.

Please also note that NIO's earnings press release and this conference call includes discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to NIO's press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. With that, I will turn the call over to our CFO, Louis Hsieh. Louis, please go ahead.

Louis Hsieh -- Chief Financial Officer

Thank you, Jade. Hello, everyone, and thank you for joining our call today. In the first-quarter 2019, NIO delivered 3,989 ES8s, our high-performance premium electric SUV, exceeding the company's prior delivery targets between 3,500 to 3,800. This was followed by 1,124 ES8 deliveries in April, bringing total aggregate deliveries to 16,461 vehicles as of August 30, 2019.

Compared to the fourth-quarter 2018, we experienced softer demand in the first quarter due to accelerated deliveries made at the end of last year in anticipation of electrical vehicle subsidy reductions as well as seasonal factors surrounding the Chinese New Year holidays. Further, we have seen the slowdown in ES8 orders, which began -- became noticeable after Chinese New Year and has worsened into the current quarter. We anticipated sequential decrease in deliveries when second quarter closes primarily due to: one, macroeconomic concerns over the lingering U.S-China trade war; two, overall, continued sluggishness in the Chinese auto market, which saw year over year -- year-to-date wholesale vehicle sales drop 15% year over year and retail vehicle sales drop 12% year over year; three, larger-than-anticipated electric vehicle subsidies cuts, which lowered ES8 subsidies by 40% to RMB 40,500 from RMB 67,500 in 2018. Subsidies will further be released -- reduced to RMB 11,520 beginning June 26, 2019.

Additionally, we believe there is some cannibalization of ES8 orders in the current quarter caused by ES6, which became available in NIO Houses this quarter. ES6 is a sportier less expensive SUV by approximately RMB 90,000. We anticipate this move -- this more challenging and uncertain sales environment to dampen sequential demand and reflects continued weakness in ES8 sales in the current quarter. In light of the challenging sales backdrop and macroeconomic environment, the company has already began taking steps to control costs and optimize operational efficiencies.

Nick will elaborate later on this call. But some early results of our cost control efforts already reflected in first-quarter numbers. A quarter-over-quarter 28.8% sequential decrease in R&D spend and a quarter-over-quarter 32.2% sequential decrease in SG&A spend. These initial efforts provide us the runway required to optimize the business sustainability for the long run.

We expect to see more efficiency gains to pick up in the coming quarters. Also as part of the larger restructuring initiative to optimize operational efficiencies, we made the hard and necessary decision to pare down headcount by 4.5% to 9,390 globally as of April 30, 2019, down from 9,834 at the end of 2018. And now I'd like to give you an update on our sales expectations for ES8 and ES6. With 1,124 ES8 deliveries in the month of April, total ES8 deliveries for the year 2019, four months, stood at 5,113.

Moving to our ES6, our second production model, a five-seater high-performance premium electric SUV. We are excited that, as of today, the first ES6 ready to be delivered in our external users is rolled off the production line. In June, as scheduled, more ES8s will be produced and the first deliveries will reach NIO users. The ES6 has received broad-based positive feedback from the media and potential customers.

Ever since its recent Shanghai Auto Show and the early reviews from our ES6 test drive campaign launched in May bode well for continued positive momentum. We currently have more than 12,000 ES6 preorders as a growing pipeline, among which over 5,000 were added during the past five and a half weeks since the Shanghai Auto Show. Our users had the access to touch and feel the ES6 for the first time. We are confident that as more and more new potential users start to experience the ES6 firsthand from behind the wheel and on the road that the vehicles competitive features and price will translate to increased market demand.

Now through the lens of optimizing efficiencies, controlling costs and managing cash flows, I would like to provide some specifics on how we are approaching certain business decisions related to our service network. Starting with our NIO Houses. NIO pop-up houses are important to our direct-to-sales model. We currently have 15 NIO Houses in 12 cities across China.

These are complemented by 17 NIO pop-up houses as an additional 17 cities. Going forward, we will shift our focus to smaller NIO pop-up houses in a similar kind. NIO pop-up houses require less capital and provide greater flexibility on the cost side. We believe that the combined number of NIO house and NIO pop-up houses across China provide the necessary support and coverage for our sales and market penetration plans and a limited number of new facilities will be added in the near future.

For NIO service centers as of April 2019, we have 14 covering major cities across the country. We had an additional 100 authorized service centers nationwide, forming a comprehensive network coverage. Authorized service centers or ASCs represent cooperation with existing Tier 1 4S dealership partners. We have a dedicated team that selects, trains and certifies ASCs to be part of our network.

To support our sales goals in 2019, we will focus on the asset-light ASC to expand our service coverage. Turning to NIO Power. We presently have 125 NIO battery swap centers throughout the country, which we believe will provide sufficient coverage for our users at this stage. By continually analyzing our location data, we can flexibly deploy these resources and adjust locations to fully optimize the efficiency of this power solutions network.

With NIO Power mobile, we currently have around 500 on the road, which can easily support both our current users as well as our anticipated future users in 2019. Currently, around 80% of NIO users have installed home chargers, which remain as the most efficient and cost-effective power solutions for both our users and the company. We launched our fast charger power station recently at the Shanghai Auto Show and a number of the fast charger is still small. We still only install future fast chargers based on surge demand of our vehicles and service needs.

In April, we opened our one click power solution network in other electric vehicle -- to other vehicle -- electric vehicle brands in China. With this program, third-party EV owners in China are able to use the NIO power one click valet charging service. This will allow for the growth of the service, improve the operating efficiency and expand NIO's brand awareness across the electric vehicle general public. On a separate note, I would like to give you a brief update on a few of our ongoing initiatives.

At the Shanghai Auto Show, company showcased a preview version of ET7, a high-performance premium electric sedan. Recently, the company made the decision to design and develop ET series with the future NIO platform 2.0 or NP2, a new generation product platform of NIO with Level 4 autonomous driving capabilities. We will provide an update on the launch time line of ET series in the future. Meanwhile, the company plans to leverage the platform technologies from ES8 and ES6 to create a new model design more efficiently and expect to launch the third vehicle model in 2020.

We will continue to invest in research and development in our products and our technologies, in particular, NP2. As we do so, we will look to build strategic research alliances with partners in the automotive and technology sectors. We expect such collaborations can continually advance the technologies of our vehicles and platforms to leverage strength and resources. Recent developments.

First, we are very pleased to announce that NIO has entered into a framework agreement with Beijing E-Town International Investment and Development company, E-Town Capital, an investment company headquartered in Beijing Economic Technology Development Area, so-called BDA. Pursuant to this agreement, the company will establish an entity as NIO China in the BDA and contribute certain businesses and assets into this entity. E-Town Capital will initially invest up to RMB 10 billion through its affiliated entities or jointly with third parties in NIO China in exchange for a minority equity stake. Furthermore, it is expected that E-Town Capital will help NIO to build or to find third-party partners to build a new manufacturing facility for our next-generation vehicles of NIO.

We will continue working together toward signing a binding definitive agreement for this investment. Second, in April 2018, the company established a joint venture company, GAC-NIO, together with NIO Capital, Guangqi New Energy Automotive and GAC to mainly engage in electric vehicle and parts development, sales and service. William Li, founder, chairman and ehief executive officer of NIO, is serving as the chairman of GAC-NIO. About a week ago, GAC-NIO released a new brand, Hycan He Chuang and plans to launch the first vehicle model this year.

We expect to work strategically with GAC-NIO and leverage each other's strengths in technology, supply chain and service networks. Third, ES6 manufacturing agreement. In April 2019, we entered into a manufacturing cooperation agreement with JAC for the ES6, which is basically a supplement to our existing manufacturing agreement of the ES8. We will continue paying JAC manufacturing fees on a per-vehicle regular basis and compensate JAC for its audited operating losses.

Please refer to our earnings press release published on our ri website a few hours ago for more details. With that, I will now turn the call over to our vice president of finance, Mr. Nick Wang, to provide the financial details for the quarter. Nick? Please go ahead.

Nick Wang -- Vice President of Finance

Thank you, Louis. I'll now go over some of our financial results for the first quarter of 2019. To be mindful of the length of this call, I will address financial highlights here and encourage listeners to refer to our earnings press release, which is posted online for additional details. Our total revenues in the first quarter of 2019 were RMB 1.6 billion or $243.1 million, representing a decrease of 52.5% from the fourth quarter of 2018.

Our total revenues are made of two parts, vehicle sales and auto sales. Vehicle sales in the first quarter of 2019 were RMB 1.5 billion or $228.8 million, representing a decrease of 54.6% from the fourth quarter of 2018. The decrease in vehicle sales over the fourth quarter of 2018 was attributed to accelerated deliveries of the ES8 in the fourth quarter of 2018 in anticipation of EV subsidy reductions in China in 2019 as well as the seasonal slowdown surrounding the Chinese New Year holidays in the first quarter of 2019. Other sales in the first quarter of 2019 were RMB 96.0 million or $14.3 million representing an increase of 76.4% from the fourth quarter of 2018.

The increase in other sales over the fourth quarter of 2018 was mainly attributed to increased revenue derived from NIO Life merchandise and services provided in first quarter of 2019. Cost of sales in the first quarter of 2019 was RMB 1.9 billion or $275.7 million, representing a decrease of 45.9% from the fourth quarter of 2018. The decrease in cost of sales over the fourth quarter of 2018 was mainly driven by the decrease of delivery volume on the ES8 in the quarter. Gross margin in the first quarter of 2019 was negative 13.4%, compared with positive 0.4% in the fourth quarter of 2018, mainly driven by the decrease of vehicle margin in the quarter.

More specifically, vehicle margin in the first quarter of 2019 was negative 7.2%, compared with positive 3.7% in the fourth quarter of 2018. The decrease in vehicle margin was mainly driven by the decrease of delivery volume of ES8 in the quarter. Research and development expenses in the first quarter of 2019 were RMB 1.1 billion or $160.7 million, representing an increase of 55.4% from the first quarter of 2018 and a decrease of 28.8% from the fourth quarter of 2018. Excluding non-GAAP share-based compensation expenses, research and development expenses were RMB 1.0 billion or $155.9 million, representing an increase of 52.7% from the first quarter of 2018 and a decrease of 30% from the fourth quarter of 2018.

The decrease in research and development expenses over the fourth quarter of 2018 was primarily attributed to the higher design and professional expenses incurred in the fourth quarter of 2018 to support the frequent test, research and development stage of the ES6, our five-seater high-performance premium electric SUV launched in December 2018. Selling, general and administrative expenses in the first quarter of 2019 were RMB 1.3 billion or $196.7 million, representing an increase of 71.5% from the first quarter of 2018 and a decrease of 32.2% from the fourth quarter of 2018. Excluding non-GAAP share-based compensation expenses, selling, general and administrative expenses were RMB 1.2 billion or $183.9 million, representing an increase of 67.6% from the first quarter of 2018 and a decrease of 32.4% from the fourth quarter of 2018. The decrease in selling, general and administrative expenses over the fourth quarter of 2018 was primarily attributed to decreased marketing and promotional activities and decreased expenditures on outsourcing professional services.

Loss from operations in the first quarter of 2019 was RMB 2.6 billion or $390.0 million representing an increase of 78.8% from the first quarter of 2018 and a decrease of 24.1% from the fourth quarter of 2018. Excluding share-based compensation expenses, non-GAAP adjusted loss from operations was RMB 2.5 billion or $372.2 million, representing an increase of 75.7% from the first quarter of 2018 and a decrease of 24.4% from the fourth quarter of 2018. Share-based compensation expenses in the first quarter of 2019 were RMB 119.6 million or $17.8 million, representing an increase of 184% from the first quarter of 2018 and a decrease of 15.6% from the fourth quarter of 2018. The decrease in share-based compensation expenses over the fourth quarter of 2018 was primarily attributed to the decrease of share-based compensation expenses related to certain directors and executive officers.

Our net loss was RMB 2.6 billion or $390.9 million in the first quarter of 2019, representing an increase of 71.4% from the first quarter of 2018 and a decrease of 25.1% from the fourth quarter of 2018. Excluding share-based compensation expenses, adjusted non-GAAP net loss was RMB 2.5 billion or $373.1 million in the first quarter of 2019, representing an increase of 68.2% from the first quarter of 2018 and a decrease of 25.5% from the fourth quarter of 2018. Net loss attributable to NIO's ordinary shareholders in the first quarter of 2019 was RMB 2.6 billion or $395.2 million, representing a decrease of 32.8% from the first quarter of 2018 and a decrease of 24.6% from the fourth quarter of 2018. Excluding share-based compensation expenses and accretion on redeemable noncontrolling interests to redemption values, adjusted net loss attributable to NIO's ordinary shareholders on a non-GAAP basis was RMB 2.5 million or $372.7 million.

Basic and diluted net loss per ADS in the first quarter of 2019 were both RMB 2.56 or $0.38. Excluding share-based compensation expenses and accretion on redeemable noncontrolling interests to redemption value, non-GAAP adjusted basic and diluted net loss per ADS were both RMB 2.42 or $0.36. Our balance of cash and cash equivalents, restricted cash and short-term investment was RMB 7.5 billion or $1.1 billion as of March 31, 2019. On January 1, 2019, the company adopted ASC 842, leases and used additional transitional method to initially apply this newly lease standard at the adoption date.

Right-of-use assets and lease liabilities were recognized on the company's consolidated financial statements. And now for our business outlook. For the second quarter of 2019, the company expects deliveries to be between 2,800 and 3,200 vehicles, representing a decrease of approximately 19.8% to 29.8% from the first quarter of 2019. This outlook incorporates the planned delivery of several hundred ES6 in June 2019.

The company also expects second quarter total revenue to be between RMB 1.1 billion and RMB 1.3 billion or between $169 million and $193 million. This would represent a decrease of approximately 20.7% to 30.5% from the first quarter of 2019. So this concludes our prepared remarks. I will now turn the call over to the operator to facilitate our Q&A session.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Bin Wang of Credit Suisse. Please go ahead.

Bin Wang -- Credit Suisse -- Analyst

Hi. Thank you so much for taking my questions. I have three one. The first one is about ES6 order.

Actually, you said that in the past 5.5 weeks, you got around 5,000 orders. I would recall in the conference call in the year 2018 results, you mentioned already you have got 7,000 orders by around March, early March. So nearly -- around one month in between. It seems that in that one month, not much order received.

Can you explain why in that one month not much order for ES6? That's number one question. Number two question is about your recent announcement about NIO China. Can I know what's the specific arrangement? It means that under this call will be another joint venture between NIO Inc. and E-Town? And what will be that effect in addition into this NIO China asset details, please? And number three, can you confirm whether your full-year volume guidance changed or not? And remember your full-year volume guidance is 40,000 units, it's more than 20,000 units with ES6, can you remind us your full-year volume guidance? Thank you.

Louis Hsieh -- Chief Financial Officer

Hey, Wang Bin, this is Louis. I'll take one and three, and I'll let William and Nick answer two. For one, we had 7,000-something orders -- preorders for ES6, but don't forget, those orders are refundable. So during May, March and -- I mean, during that month before the Shanghai Auto Show, there was a 1,000-or-so plus, I can't remember the exact number, who also got a refund on their order.

So what we're talking about is new orders from April, I guess, 17th or 18th when the Shanghai Auto Show started until yesterday. So those five weeks, but -- don't forget there's also cancellations in orders. So it's a moving target, but it's very encouraging to see 5,000 new preorders in only five and a half weeks since ES6 was launched. It has gotten obviously very good accolades and very good reviews from the press and from the driving magazines.

On question three, regarding the guidance, we had targeted for the year -- I've been telling people recently about 35,000 to 40,000 as of -- in March or so a few months ago. The slowdown has hit us with the subsidy reduction. Remember ES8 subsidies went from 67,000 down to under 40,000 and going to 11,000 ES8 soon. And then, with the trade war and the softening environment, I think at this time, we are not prepared to give any kind of target number for the full year.

What I'd like to do is wait until ES6 is launched and see how that ramps up, so we'll be in a better position to give full year sort of targeted numbers. It's unofficial but targeted numbers in a couple of months once ES6 is launched. And then, William and Nick, you want to take the E-Town question?

Nick Wang -- Vice President of Finance

Yes. OK. [Foreign language]

Jade Wei -- Senior Director of Investor Relations

Wang Bin, thank you for your question. So regarding our recent announcement about our framework agreement with the E-Town International Investment and Development Co., which is E-Town Capital. Actually, E-Town Capital has been helping us through its third-party partners and also its affiliated entities to inject about RMB 10 billion in exchange for the minority equity stake for the NIO. And at the same time, NIO will be establishing NIO China in the BDA E-Town.

So we will be reallocating part of our major business to this NIO China, but still NIO Inc. will be holding most of its control over the NIO China and also NIO China will be part of our consolidated statements. So NIO China will be important channel and the tool for our RMB fundraising because it's through our public in the NYSE, we have a very diverse fundraising channel for the U.S. dollars.

With the NIO China, we can diversify our fundraising channel for the RMB, with both fundraising channels I think it will help us to sustain our future developments for the second-generation platform. And the team is now working with E-Town on the details of this definitive agreement and there will be a lot of details that need to be refined, and we will keep you guys updated on this news.

Operator

Thank you. Our next question comes from the line of Wei Feng of CICC. Please go ahead. Your line is open.

Wei Feng -- CICC -- Analyst

OK. Thank you for taking my question. So my first question is also about NIO China. So E-Town will become a minority shareholder of NIO China.

Besides the term of getting fresh capital, what can NIO expect from E-Town? And will NIO setup manufacturing capability in Beijing, so would you prefer the outsourcing or turn to the in-house manufacturing in the future? That's the first question. The second question is about how to stimulate the sales if the demand continues to remain weak? Do we have any other plans to stimulate the sales? This is second question. And the second question is about NIO and GAC-NIO. Would the JV in the future generate any cash flow to NIO and what is synergy between NIO and GAC-NIO? Thank you.

Louis Hsieh -- Chief Financial Officer

William, you want to take these three questions after Li translates?

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

OK. [Foreign language]

Jade Wei -- Senior Director of Investor Relations

So regarding your first question, the framework agreement that we entered with E-Town Capital is mainly, as William mentioned, that the E-Town Capital will be helping us to find the third-party partners to build a manufacturing facilities for next-generation platform products. But for the near term, we will be upholding the joint manufacturing model as we are having right now with the JAC because this manufacturing corporation has a very high efficiency in terms of the management and investment. Of course, we will not exclude any opportunities that we may be establishing our own manufacturing facilities, but for this RMB 10 billion fundraising or assets you're raising it is more of a development, research and also the user network requirements.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

[Foreign language]

Jade Wei -- Senior Director of Investor Relations

Regarding your second question about the sales volume of ES6. Actually, we've kicked off the global media test drive and also the nationwide user test drive, and we've been collecting a lot of feedback, a positive feedback and the review from this people and the participants. So for the next following months, we will be taking active market campaigns both online and offline, so that more people can appreciate and understand our product. We will organize more test drive for our potential users, and we will also seek to expand our sales channel.

Of course, direct sales -- direct selling will still be one of our top priorities, but at the same time, we will try to find opportunities, so that we can present our products from our partners' site and more people will get to know our brand. And for ES6, we believe it is a powerful and strong product compared with the Q5 from -- from Audi, GLC from Mercedes-Benz and X3 from BMW. Actually, ES6 is on par with this. If you look at the sales volume of ES8 for the first four months of 2019, you will find its sales volume ranked the first place among all the seven-seater premium SUV.

Actually, the sales volume of ES8 has surpassed the volume of XC90 for the first four months this year. And the sales volume of ES8 is two times the sales of the Model X from Tesla. And for ES6, it will be tapping into a wider market, the five-seater SUV. And in this competition, we believe that the ES6 will be outperforming other products even including the gasoline cars.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

[Foreign language]

Jade Wei -- Senior Director of Investor Relations

As for your third question about the joint venture between GAC and NIO, we just announced the GAC-NIO's latest brand. That is Hycan He Chuang. And they will be launching the product next year. This is a very important long-term strategic partnership for both sides.

So we can leverage each other's strengths in terms of the R&D, supply chain and service network. And we can also utilize the synergies. And we have confidence with this sustainable and long-term partnership. We may not see some immediate payback or returns at the short term, but we believe for the long term, this will be a very good partnership for both sides.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

[Foreign language]

Jade Wei -- Senior Director of Investor Relations

And also for this Hycan, actually the price range of Hycan will be a bit lower than the price range of NIO products. So with this platform or with this joint venture, it doesn't mean that NIO will be selling our products directly with this platform. Instead, we want to leverage its cost efficiency on this highly competitive platform, so that we will be tapping into the wider market. This is another approach for NIO to expand our market presence.

Wei Feng -- CICC -- Analyst

OK. Thank you, William.

Operator

Thank you. Our next question comes from the line of Dan Galves of Wolfe Research. Please go ahead.

Dan Galves -- Wolfe Research -- Analyst

Thanks for taking questions. The first question is related to competitive dynamic for ES8. What is expected with the subsidy ready to come down even further in June that you might have a prebuy of this product? Maybe if you could just talk about what vehicles the ES8 is competing with? And how it's doing competitively in terms of market share? The second question is just about if you could help us to understand the cash burn in Q1? If you could give us any detail on what the capex was, working capital? And more importantly, what is the outlook for the cash burn in future quarters? Once the ES6 launches, should we be expecting a significant lower cash burn in the future? Thank you.

Louis Hsieh -- Chief Financial Officer

William, do you want to take the ES8 competitive landscape question, and Nick, you can take the cash burn question for R&D and capex spend? William?

Nick Wang -- Vice President of Finance

OK.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

OK. Yes. [Foreign language]

Jade Wei -- Senior Director of Investor Relations

Regarding the question about the competitiveness of ES6 -- sorry, ES8. Actually, ES6 -- sorry, ES8 not only targets at the premium electric SUV, it also aims at the segments of all the premium six- and seven-seater SUVs including EV and also the gasoline cars. So our competitors in this segment include Q7 from Audi; GLS from Mercedes-Benz; XC90 from Volvo; and Model X from Tesla. So for the short term, the subsidy reduction may affect our competitiveness a little bit, but we do have other advantages including our high-performance, our user satisfaction, our user network and for our users, they tend to enjoy 10% purchasing tax discount for buying a EV, and we also enjoy the preferential policies for the license plate application and usage in cities like Beijing or Shanghai.

So in the long run, this advantages will help us to offset the impact of the subsidy reduction. And we believe that the ES8 will still be a very strong and a powerful product in this segment. Thank you.

Nick Wang -- Vice President of Finance

I think to answer your question about the cash burn. I think in Q1, we -- I won't call it burn, we actually have a cash -- net cash outflow over RMB 4 billion, but the special note, it will be paid to debt there because in December, we delivered more than 7,000 units, but in Q1, we only delivered like roughly half of it. So there's a huge working capital gap, a lot of payments occur in the months of January and February as well. So working capital is taking a significant portion of it.

And also if you look at our expenses item like R&D as well as the SG&A that actually take some large portion as well. So overall, and moving forward, we think that this cash burn rate is going to go down quarter by quarter for a couple of reasons. Number one is actually with the launch of ES6, we're going to bring more volume into the picture. Accordingly, and as a result, working capital is going to help our cash flow.

Number two, with the launch of our LOP or Lean Operation Program, essentially you can call it the internal organizational optimization program. We're going to cut down our costs, cut down unnecessary spending in both the strategic spending, R&D by rebalancing our product portfolio and also balancing our self-network spending versus seek some strategic alliance in the channels, so we can cut down significantly. And also in terms of our peoples and the daily operation, we issued a new policy and put the stringent mindset into people's mind. So -- and that makes the -- make the lean operation concept not only reflected in the number, it will reflect in every minds of our employees.

Louis Hsieh -- Chief Financial Officer

Hey, Dan, it's Louis. We expect Q2 cash burn to be a little bit high, but then Q3 and Q4, once ES6 starts delivery, we expect the cash burn to come down relatively quickly.

Dan Galves -- Wolfe Research -- Analyst

OK. Thank you.

Operator

Thank you. The next question comes from the line of Fei Fang of Goldman Sachs. Please go ahead.

Fei Fang -- Goldman Sachs -- Analyst

Hi. William, Louis, Nick, Jade, thanks for taking my question. Can you give us an update on the content and specs of the ES6? Are you still on track to install 811 NCM batteries and also will Level 2.5 be ready upon the launch? And also in light of the current environment, do you see opportunities to reduce component prices from suppliers? And if so where do you see most of that, whether it's battery, motor, inverter or others? Thank you.

Louis Hsieh -- Chief Financial Officer

Thank you, Fei. William, do you want to talk about ES6 specs and the current reduction in price possibilities?

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

Yes. [Foreign language]

Jade Wei -- Senior Director of Investor Relations

About the 811 NCM battery pack, actually, it is proceeding as our schedule. So it will be available to our users in July. And actually, in our validation in past, the 811 NCM battery pack showed strong performance, so we are quite confident about it. As for our operational partnership with CATL, our battery cell supplier, actually, we have a long-term cost-reduction framework with CATL.

So we will be witnessing significant cost reduction in terms of the battery pack from the third and the fourth quarter this year. Based on our volume assumption in this framework, you will witness this cost reduction very soon. Thank you.

Louis Hsieh -- Chief Financial Officer

Dan, it's Louis. Sorry, it's Louis, Fei. Some other specs just for you, which you asked about. The ES6 is very competitive with the likes of Mercedes EQC, iPace, Model 3 and Model X and Model S from Tesla.

So it's very fast, 0 to 60 in 4.7 seconds. It has longer range, 500-plus kilometers with an 84-kilowatt battery. And so its performance, its communication, its service, everything should be very competitive, if not better, and it's priced below all those models including the Model 3. So we think it's a very price competitive car.

It looks sporty, it's sharp. It is full of amenities.

Operator

Thank you. Our last question comes from the line of Yin Ling of Deutsche Bank. Please go ahead.

Yin Ling -- Deutsche Bank -- Analyst

Hi, William, Louis and Nick, thanks for taking my questions. I've got two quick questions here. My first question is on the future new products. As Louis has just mentioned, it seems like you'll be launching another model in 2020 before the ET series.

Just could you please share with us your thoughts behind this decision? And also will this be another SUV model? And what sort of markets I mean are we targeting at? And my second question is, as mentioned just now, the demand was negatively impacted by the EV subsidy cuts, so wondering if there's any chance that you will be adding a lower-price trims for the ES6 and ES8 models to drive the demand? Thank you.

Louis Hsieh -- Chief Financial Officer

William, do you want to answer these two?

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

OK. [Foreign language]

Jade Wei -- Senior Director of Investor Relations

So about the ET7 and also our new product, we launched our ET preview during Shanghai Auto Show this year, and we have received a lot of positive feedback and review about this ET preview. Actually, earlier this year, we decided that we would like to launch our ET7, our second-generation platform NP2 because...

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

[Foreign language]

Jade Wei -- Senior Director of Investor Relations

Recently, we decided to launch this ET7 on our second-generation platform NP2 because the next several years will be very important for the transformation of ADAS, AD and the smartness technologies. So you will be seeing the transformation for the sensors, for the computing units and also for the e-architecture of the vehicle. And we want to see this ongoing transformation. That's why we decided to put the ET7 on the second-generation platform.

So in terms of the launching time of ET7, it is postponed a little bit. I think this is also the best decision...

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

[Foreign language]

Jade Wei -- Senior Director of Investor Relations

It is postponed for the next generation. I believe this is a best decision for the company, for our investors as well as our users. But at the same time, we understand that the market is expecting a new product or a new model from NIO. So earlier this year, we decided that on top of the current generation platform, we would like to leverage our existing technologies to launch a new model next year.

And -- but at the moment, we may not share sufficient information with you, but understand that NIO can be quite efficient and agile in terms of our product development, so you can expect the launch of this new model next year.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

[Foreign language]

Jade Wei -- Senior Director of Investor Relations

As for the demand after the subsidy cuts, actually for our ES6 and ES8, we target at the premium SUV segment for both electric cars and also the combustion cars. For ES6 and ES8, there are competitors including a lot of premium SUVs from luxury brands. And even with this competition, we still believe that we have strong competitiveness. We have the tax discounts with purchasing tax, consumption tax and also duty.

We also have a strong performance. We have good user services. We also have the preferential policies for license plate application and usage. So we believe that may be in the short term, the subsidy costs may affect us a little bit, but in the long run, we do have the strong market performance in this segment.

And as more and more people start appreciating and adopting EVs, we believe in the long run, ES6 and ES8 will be very powerful.

Yin Ling -- Deutsche Bank -- Analyst

Thank you.

Jade Wei -- Senior Director of Investor Relations

Thank you.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Paul Gong of UBS. Please go ahead.

Paul Gong -- UBS -- Analyst

Yeah, thank you. I have two questions. The first one is regarding this new subsidiary NIO China. Since E-Town -- Beijing E-Town has committed RMB 10 billion just for minority interest in this new entity.

Does that mean NIO Inc. is also committed for more than RMB 10 billion investment into this NIO China entity? If so, this new investment into the NIO China be in the form of cash or in the form of technology or whatever or maybe IP? Can you also add a little bit color on this? This is my first question. My second question is I noticed on the balance sheet, there is some item within the equity that got additional paid-in capital. That has declined from RMB 41.9 billion to RMB 40 billion, declined by RMB 1.9 billion during this quarter.

Can you please give us a little bit color on what was the reason for that? Thank you.

Louis Hsieh -- Chief Financial Officer

William, you want to talk about E-Town, NIO China?

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

OK. Yeah. [Foreign language]

Jade Wei -- Senior Director of Investor Relations

Regarding our -- regarding this NIO China with E-Town, actually it doesn't mean that we will be investing more than RMB 10 billion into this NIO China in exchange for more equity stock. Instead, if you look at our NIO Inc. current business, actually most of our business, including our employee, including our sales network and our major business are based in China. Over 90% of our employees are based in China.

So for this asset, for this existing assets, we already have a very high and good valuation. So this is how we work with this NIO China. We will be leveraging this existing asset and the business for the equity fundraising. Thank you.

Paul Gong -- UBS -- Analyst

So you factor them all briefly to state in the way you give some minority shares to Beijing E-Town and they paid in RMB 10 billion as an investment into -- in this entity. So it's kind of form of for the finance through equity?

Nick Wang -- Vice President of Finance

Yes, that's correct. That's actually from E-Town and its affiliate. I'm going to address your second question, Paul. Essentially, this reduction on equity portion RMB 1.9 billion reflected strictly related to the convertible bond that we issued back around the end of January, early February.

So in this bond, I can explain a bit more in detail. There's a two derivative product. One is called prepaid forward, the other one is called additional call option. If you understand fundamental structure -- initial structure of a convertible bond, it's actually a face value plus 30% the price over the stock price at the time of the issuance.

So on top of it, we actually put additional call options, which raised the stock price, the call -- the stock price from 30% to 100%, so that's take roughly $80 million. The other one is the prepaid forward capital. Essentially, we used a part of the proceeds from this debt issuance to buy back some of the stock and to sweeten the deal essentially, so make this transaction completely completed. So overall, this has actually resulted in the reduction in our equity positions of RMB 1.9 billion as you compare in our balance sheet.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

Thank you, Paul.

Paul Gong -- UBS -- Analyst

OK. Thank you.

Operator

Thank you. As there are no further questions, now I'd like to turn the call back over to company for closing remarks.

Louis Hsieh -- Chief Financial Officer

Thank you, everybody, for joining us today.

Jade Wei -- Senior Director of Investor Relations

Thank you. And see you next quarter.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

Thank you, everyone.

Operator

[Operator signoff]

Duration: 68 minutes

Call participants:

Jade Wei -- Senior Director of Investor Relations

Louis Hsieh -- Chief Financial Officer

Nick Wang -- Vice President of Finance

Bin Wang -- Credit Suisse -- Analyst

Wei Feng -- CICC -- Analyst

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

Dan Galves -- Wolfe Research -- Analyst

Fei Fang -- Goldman Sachs -- Analyst

Yin Ling -- Deutsche Bank -- Analyst

Paul Gong -- UBS -- Analyst

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